Capri Holdings Ltd. (then Michael Kors Holdings Limited) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2017. The quarter comprised 13 weeks; the six-month period comprised 26 weeks. Financial statements are unaudited. Amounts are in U.S. dollars unless noted.
Business context and financial performance
The company designs, markets, distributes and sells Michael Kors-branded products through retail, wholesale and licensing businesses. Results include the Greater China business acquired in May 2016. The Jimmy Choo acquisition closed on November 1, 2017, after the reporting date.
| Metric | Three months ended Sep. 30, 2017 | Six months ended Sep. 30, 2017 |
|---|---|---|
| Total revenue | $1,146.6 million, up 5.4% year over year | $2,099.0 million, up 1.1% |
| Gross profit / margin | $690.8 million / 60.2% (up 100 bps) | $1,265.5 million / 60.3% (up 80 bps) |
| Operating income / margin | $199.1 million / 17.4% (down 2.3% in dollars) | $348.5 million / 16.6% (down 10.8% in dollars) |
| Net income attributable to the company | $202.9 million; diluted EPS $1.32 | $328.4 million; diluted EPS $2.11 |
| Cash from operations | Not separately reported for the quarter | $329.1 million, versus $347.8 million |
For the six-month period, segment revenue was retail $1,264.9 million, wholesale $767.2 million and licensing $66.9 million. Retail operating income rose to $161.2 million from $136.2 million; wholesale operating income fell to $163.1 million from $227.0 million; licensing operating income fell to $24.2 million from $27.4 million.
Liquidity, debt and cash flow
- At September 30, cash and cash equivalents were $178.2 million, down from $227.7 million at April 1; working capital was $856.0 million. Current assets were $1,330.7 million and current liabilities $474.7 million.
- Six-month cash flows: operating activities provided $329.1 million; investing activities used $96.0 million; financing activities used $291.1 million. Capital expenditures were $57.9 million.
- No borrowings were outstanding under the new $1.0 billion revolving credit facility at September 30; $988.7 million was available, subject to its terms. Short-term debt was zero, versus $133.1 million at April 1.
- After quarter-end, the company issued $450 million of 4.000% senior notes due 2024 and drew $1.0 billion under a term loan facility to help fund the Jimmy Choo transaction. The term loan is divided into $600 million due in three years and $400 million due in five years.
Material changes versus prior comparable periods
- Second-quarter retail sales increased 8.0% to $645.0 million, but comparable-store sales declined 1.8% (2.5% at constant currency). Growth reflected new stores and international e-commerce as well as foreign-exchange effects.
- Six-month retail sales increased 9.0%, while wholesale sales declined 9.4%, principally due to lower women’s accessories sales and the company’s efforts to reduce wholesale shipments and promotional activity.
- Six-month gross margin improved, helped by a greater retail sales mix, lower retail product costs and favorable geographic mix; wholesale margin weakened 210 basis points. Operating margin declined as operating expenses grew faster than revenue.
- Net income attributable to the company increased 6.6% for the six months, despite lower operating income. The period included a $41.7 million foreign-currency gain, principally a $36.7 million unrealized gain on a contract related to the planned Jimmy Choo acquisition, and a lower effective tax rate.
- Six-month share repurchases cost $157.8 million under the repurchase program, compared with $650.0 million a year earlier. The company said it did not plan further program repurchases for the remainder of fiscal 2018.
Outlook, management commentary, risks and unusual items
- Management expected operating cash flows, available cash and revolving-credit availability to meet working-capital needs for the next 12 months. It expected approximately $140 million of capital expenditures during the remainder of fiscal 2018. No specific revenue or earnings guidance is provided in the filing text.
- The company planned to close 100–125 full-price stores over two years, with estimated one-time costs of $100–$125 million and anticipated ongoing annual savings of approximately $60 million. By September 30, plans were finalized for 38 closures and 10 had closed; recorded restructuring charges were $5.9 million.
- Retail long-lived-asset impairment charges were $16.3 million, including $11.9 million for property and equipment and $4.4 million for intangible assets. These related to underperforming stores; some were expected to close.
- Management cited lower store traffic, promotional pressure, consumer shifts toward online shopping and experiences, foreign-exchange volatility, and potential shipping and manufacturing-cost disruptions. It cautioned that Jimmy Choo integration, anticipated synergies and expected financial benefits may not meet expectations.
- The Jimmy Choo currency contract produced a significant reported gain in the quarter but was not designated as an accounting hedge. It was settled October 30 at a $4.7 million gain. The acquisition’s approximately $1.40 billion transaction value, including refinancing of existing debt, was funded after quarter-end with term-loan borrowings, senior notes and cash.
- Routine legal proceedings were disclosed; management did not expect their aggregate outcome to materially adversely affect the company. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How comparable-store sales, wholesale demand and promotional activity developed after the quarter, particularly in women’s accessories.
- Whether store closures achieve the stated savings and how final closure, impairment and integration costs compare with estimates.
- The post-acquisition debt balance, interest expense, repayment obligations and compliance with the 3.5-to-1 leverage covenant.
- Jimmy Choo’s purchase accounting, integration progress, realized synergies and contribution to revenue and earnings.
- How much reported earnings growth reflects underlying operations versus the acquisition-related currency gain, tax effects and lower share count.